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Impact of Small and Medium Enterprises on


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American Journal of Business and Management
Vol. 1, No. 1, 2012, 18–22

Impact of Small and Medium Enterprises on Economic Growth and Development

Muritala Taiwo A1*, Awolaja Ayodeji M1 and Bako Yusuf A2


1
Department of Economics and Financial Studies, Fountain University Osogbo, Nigeria
2
Department of Business Administration, Federal Polytechnic Ilaro, Nigeria

This paper seeks to investigate Small and Medium Enterprises as a veritable tool in Economic Growth and
Development. A survey method was used to gather data from 200 SME/Entrepreneurial officers and Managers
from five selected local government in Nigeria namely; Ijebu North, Yewa South, Sagamu, Odeda and Ogun
Waterside Local government. Data was collected with a structured questionnaire and analyzed with several
descriptive statistics to identify the perception of the roles of SMEs in Nigeria. The results of the study therefore
reveals that the most common constraints hindering small and medium scale business growth in Nigeria are lack
of financial support, poor management, corruption, lack of training and experience, poor infrastructure,
insufficient profits, and low demand for product and services. Hence, it therefore recommends that Government
should as matter of urgency assist prospective entrepreneurs to have access to finance and necessary information
relating to business opportunities, modern technology, raw materials, market, plant and machinery which would
enable them to reduce their operating cost and be more efficient to meet the market competitions.

Keywords: SMEs; entrepreneurial; enterprise; economic growth; development; local government; Nigeria

Introduction
productivity growth. At this level, perspectives are
The role of Small and Medium-Scale Enterprise directed towards government support and
(SMEs) in the national economy cannot be involvement in exploiting countries social benefits
underestimated. These enterprises are being given from greater completion and entrepreneurship.
increasing policy attention in recent years, Secondly, proponents of SME support frequent claim
particularly in third world countries partly because of that SMEs are generally more productive than large
growing disappointment with results of development firms but financial market and other institutional
strategies focusing on large scale capital intensive improvements, direct government financial support to
and high import dependent industrial plants. The SMEs can boost economic growth and development.
impact of SMEs is felt in the following ways: Some argued that SMEs expansion boosts
Greater utilisation of local raw materials, employment more than large firm growth because
employment generation, encouragement of rural SMEs are more labour intensive thereby subsidizing
development, development of entrepreneurship, SMEs may represent a poverty alleviation tools, by
mobilisation of local savings, linkages with bigger promoting SMEs and individual countries and the
industries, provision of regional balance by spreading international community at large can make progress
investments more evenly, provision of avenue for towards the main goal of halving poverty level by
self-employment and provision of opportunity for year 2020 i.e to reduce poverty by half and becoming
training managers and semi-skilled workers. The vast among 20 largest World Economies (Nigeria Vision
majority of developed and developing countries rely 20:2020). Entrepreneurial development is therefore
on dynamism, resourcefulness and risk tasking of important in the Nigeria economy which is
small and medium enterprises to trigger and sustain characterized by the following heavy dependence on
process of economic growth. In overall economic oil, low agricultural production, high unemployment,
development, a critically important role is played by low utilization of industrial capacity, high inflation
the small and medium enterprises. Small and medium rate, and lack of industrial infrastructural base. These
enterprises advocates, firstly, it endurance constraints limit the rate of growth of entrepreneurial
competition and entrepreneurship and hence have activities in Nigeria. Hence, this paper seeks to
external benefits on economy wide efficient, and investigate Small and Medium Enterprises as a
veritable tool in Economic Growth and Development.
This paper seeks to investigate Small and Medium
*Corresponding author. Email: muritaiwo@yahoo.com Enterprises as a veritable tool in Economic Growth

© 2012 World Scholars


19 M. Taiwo et al.

and Development in Nigeria. The purpose of this 50% of Nigeria’s employment, and 50% of its
study is to come up with a set of potential industrial output (Ariyo, 2005).In his own
determinates that affect the adoption of SMEs and set contribution to the definition of the subject matter,
of potential supporting activities to influence Birch (1970) argued that small firms are particularly
economic development in Nigeria. In this research, important in job creation. He reported that over the
focus was only on SMEs in five local governments in 1970s, firm with fewer than 100 employees generated
Ogun State - the western part of Nigeria. Therefore, eight out of every ten new jobs in America. This
the first limitation faced by this study is that the evidence was however rejected by a wide array of
research findings of SMEs in the area might not be evidence in the study conducted by Divine Brown
able to represent the correct situation in the rest of the (1990), which revealed that large firms were
country. The problem is that the majority of SMEs in dominant source of net job creation in the
Nigeria might face different problems from different manufacturing sector.
sectors and business areas. UNCTAD (2001) affirms that countries with a
Another limitation in the research on these high rate of small industrial enterprises have
Nigerian SMEs is that since questionnaires are used succeeded in making the income distribution (both
to collect and investigate the roles of SMEs in regionally and functionally) more equitable. This is
Nigeria, the major disadvantage of this method is the in turn a key distribution to ensuring long term social
inability to interact with respondents in order to ask stability by alleviating export redistribution presume
more detailed and in-depth questions to discover and by reducing economic disparities between urban
more information as the study permits. This and rural areas.
limitation pose a problem for this study as the This study therefore, aims at cross-examining
inability to discover in-depth influenced between various SME policies adopted by Nigerian
SMEs and economic development, and to measure Government to discuss the impact of business
accurately the clear reasons given by each environment of SMEs development, to examine
respondents. challenges and factors hindering the growth of SMEs
However, since this study makes use of primary and to proffer solutions to identified problems of
data, the instruments need to be subjected to more SMEs.
statistical tests in order to establish a more robust
validity and reliability. The instruments could be Theoretical Framework
further refined to more closely capture each of the
problem areas identified in the literature. It is Small and Medium business constitute the very
suggested that that replication of this study should foundation upon which the large businesses were
involve larger samples and a broader geographic base built, however, small and medium have been
for cross-validation purposes. identified differently by various individuals and
organization such that an enterprise that is considered
small and medium in one place is seen differently in
Literature Review
another. Even within a country, the definition
changes over time. Some common indicators
In Nigeria, the Third National Development plan
employed in the various definitions include total
(1975-1980) defines s small business as a
assets, size of labour employed, values of annual
manufacturing or service organization whose
turnover and capital investment (Baenol, 1994).
employee is not more than 10. The individual
The small scale industries of Federal Ministry of
research unit of Obafemi Awolowo (1987) defines it
Industries defined small scale as ‘’ enterprises having
as”one whose total assets or capital is less than N50,
capital (investment in land, building, machinery and
000 and employee fewer than 50 full time workers”.
equipment and working capital) up to N60,000.00
Glos et al (1976) referred to it as “a whole sales
and employing not more than 50 person” as far back
whose annual sales do not exceed 9.5million dollars.
as 1979. The Central Bank’s monetary and credit
Small businesses are however very important in the
guidelines, small-scale industries were regarded as
nation’s economy.
establishment whose annual turnover is less than
Meanwhile, a study by the Federal Office of
N6million and capital not exceeding N10million.
Statistic (2001) shows that 97% of all business in
According to Brwon, Medott and Hamitton (1990),
Nigeria employed less than 100 employees. Going by
Many Small firms are created as a last resort rather
this definition of SMEs, an umbrella term for firms
than as first choice and have therefore invited growth
with less than 250 employees, it means that 97% of
potential.
all businesses in Nigeria and to use the term ‘Small
Although, the pro-SME view argues that small
Business”. The SME sector provides an average of
firms are more innovative than large firms; the micro
American Journal of Business and Management 20

economic evidence is at best inconclusive. and Medium Enterprises Development Agency of


Examining US firms, Andretch (1987) find small Nigeria (SMEDAN), National Economic
firms have higher innovation rates in high Reconstruction Funds (NERFUND), National
technology, capital intensive industries. For a sample, Poverty Eradication Programme (NAPEP), National
Schiuardi (2001) study on European industries show Economic and Empowerment Development Strategy
a larger average firm size is associated with faster (NEEDS), Small and Medium Industry Equities
innovation rates. Investment Scheme (SMIEIS) and so on.
In developing countries, there is little R & D Despite the huge amounts spent on the
activity such that technology transfer from abroad development of these policies for SMEs growth,
and initiative drive productivity improvement Sagagi (2006) noted that not much changes and
Rosenberg (1976). Thus, from a developing countries improvements have been achieved. The reason for
perspective, the firm level evidence does not favour this as he indicated was attributed to limited
SME subsidization as a mechanism for boosting financing and support, as well as inadequate
innovation and productivity growth. Consistent with infrastructure, insecurity and lack of training and
theoretical argument outlined, emerging empirical vocational facilities
evidence supports the view that firm size responds to
National characteristic.
Methodology
Maksimonie (2002) find that financially, more
developed countries tend to have larger firms. This
This paper seeks to investigate Small and Medium
suggest that financial development ease financial
Enterprises as a veritable tool in Economic Growth
constraints on successful firms and allow them to
and Development in Nigeria. The purpose of this
grow. Kumar, Rajan and Zingales (2001) show that
study is to come up with a set of potential
countries with better institutions as measured by
determinates that affect the adoption of SMEs and set
judicial system tend to have larger firms.
of potential supporting activities to influence
Furthermore, Agbonifor (1998) noted that SMEs is a
economic development in Nigeria. Registered SMEs
crucial factor in economic development. They
operating in five local governments, namely: Ijebu
indicated that it is a means by which productive
North, Yewa South, Sagamu, Odeda and Ogun
activities indigenously owned and controlled and it is
Waterside as shown on the register of the Ogun State
a means by which productive resources and talents
Ministry of Commerce and Industry, constituted our
that might not otherwise be put into productive uses.
target population. They are categorized into
This will at least reduce the unemployment menace
production, professional services and others.
which Nufakho (1998) said have reached an alarming
In order to confirm the greatest drawback for
proportion.
SMEs in Nigeria and fully appreciate their respective
Brian Levy (1993) explained that the study of
relevant significance, we had postulated the
entrepreneurship has relevance today, not only
following hypotheses:
because it helps small business or entrepreneurs
H0: There is no significance relationship
better fulfill their personal needs, but also because of
between SMEs and Economic Growth and
the economic contribution of the new ventures. Brian
Development
Levy therefore sees SMEs as a positive force in
H1: There is significant relationship between
Economic growth and development. He stresses
SMEs and economic growth and development.
further by summarizing the importance of SMEs to
Primary sourced data is the main data used for
include ensuring rapid development, increased
analysis. These were collected using a 5-point Likert
utilization of local resources and provision of a
scale questionnaire, administered to the selected SME
training ground for indigenous managers and semi-
operators. This did not pose a problem, due to the
skilled workers, reduction of the rural-urban drift,
fact that the questionnaires were administered
development of indigenous technology and raising
through the secretariat of the Ogun State Chamber of
the living standard of rural dwellers and so on. In
Commerce & Industry. The study was mainly based
fact, SMEs accounts for the economic development
on information derived from responses to the
in most developed economies of the World today. It
questionnaire and data collected from Local
has helped in the balance of payment position of
Government records.
countries; it reduces over dependence on inputs
Primary data employed for this study were
relative to their capital investment. Sequel to the
collected from a cross section of SMEs in the
aforementioned benefits, the Federal Government of
selected local governments. Random sampling
Nigeria has made several attempts via the
technique was used to determine the eligible
introduction of various policies at developing SMEs
entrepreneurs to be questioned.
in Nigeria. Notable amongst these policies are; Small
21 M. Taiwo et al.

Data collected was presented in tabular form with importance of SMEs and the Economic growth and
descriptive statistic while the hypothesis formulated Development.
was tested with correlation coefficient to determine
the respondents’ perception on the subject matter. Table 2. Showing correlation co-efficient analysis.
This study employed a multi-methodology approach X Y X2 Y2 XY
in which both qualitative and quantitative approaches 320 75 102400 5625 24000
were used. In all, 200 respondents that made up the 335 70 112225 4900 23450
sample were randomly selected. 405 84 164025 7056 34020
310 76 96100 5776 23560
380 77 144400 5929 29260
Findings 195 56 38025 3136 10920
265 59 70225 3481 15635
On the analysis relating to the responses on the type 320 78 102400 6084 24960
of small business engaged by the people, reveals that 450 84 202500 7056 37800
majority 120 (60%) of the respondents are into 360 85 129600 7225 30600
trading business. Only 47 (23.5%) are into production ƩX ƩY ƩX2 ƩY2 ƩXY
3340 744 1161900 56268 254205
business; another 28 (14%) are into services
rendering business while 25 (12.5%) are into other r=
( ) ( )
types of small business that is, they combine trading, r = 0.88
production and services rendering businesses.
Analysis on the responses on how business has been,
reveals that more than half of 118 (59%) of the Conclusion and Recommendation
businesses in this study were considered profitable by
the owners and/or management staff and 32 (64%) of A major gap in Nigeria’s industrial development
the businesses were described as very profitable process in the past years has been the absence of
while 9% (18) were reported not profitable. strong SME sub-sector. With over 165million people,
However, the analysis showing responses on the vast productive farmland, rich variety of mineral
estimated annual incomes of businesses, reveals that deposits and other natural resources, Nigeria should
only 12.5 of the business surveyed made profits of at have been a haven for SMEs.
least N1 million naira (about US $10,000.00) per Unfortunately, SMEs have not played the
annum while the vast majority made profits of significant role they are expected to play in Nigeria
between N100,000 naira and N1 million naira per economic growth and development. Driven by the
annum (between US $700.00 and US $7000.00). findings in the study, SMEs in Nigeria have a long
From the findings and as indicated in the Table way to go for the sector to be productive enough and
1, it shows that majority of the respondents 151 play the curial role it is expected to be in relation to
(75.5%) agreed that there is significant relationship contributing to the growth and development of the
between SMEs and economic growth and economy of Nigeria. The challenges and problems of
development. Table 1 showing responses on the the SMEs in Nigeria are hydra-headed and hence can
relationship between SMEs, economic growth and only be effectively tackled by a multi-dimensional
development. and concerted approach by all stakeholders i.e the
government (Federal, State and Local) and other
Table 1. Descriptive statistic on SMEs and economic agencies and parastatals, banks, regulatory authorities
growth and development as well as SMEs (owner and Management), the
employees and other donor agencies. This research
Response Number Percentage
therefore concludes that the main causative factor as
Strongly Agreed 84 42 to why Nigerian SMEs are performing below
Agreed 67 33.5 expectation as to having a relationship to our
Undecided 5 2.5 environment. This includes our culture, government,
Disagreed 13 6.5 lackluster approach to government policy enunciation
Strongly Disagreed 31 15.5 and poor implementation among others. The solution
Total 200 100 to the problems of Nigeria SMEs can only be realized
if both the leaders and the citizens concertedly work
The coefficient size of the study suggests not only together. The government has to take the lead by
positive significant but has high correlation co- extending their reforms to the educational and
efficient of 0.88. The result has confirmed the industrial sectors especially as regards policy
economically meaningful relationship between the formulation and implementation, port reforms,
transportation sector reforms, revamping the
American Journal of Business and Management 22

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